What are some differences in the analysis for a replacement project versus that for a new expansion project?

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What are some differences in the analysis for a replacement project versus that for a new expansion project?

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What are some differences in the analysis for a replacement project versus that for a new expansion project?

Explanation & AnswerSolution by a verified expert

Explanation

A replacement project aims to decide whether an existing machine should be replaced. The new machine increases cash flow by reducing production costs or enhancing sales. For replacement projects, incremental cash flows—the difference in cash flows from the new machine and cash flows foregone from the use of old machine—are considered.
 
An expansion project is an increase in the production capacity of the existing facilities or an introduction of a new product line.

Verified Answer

Replacement project are projects where a firm must decide whether to replace an existing machine, whereas an expansion project is new investment into existing facilities to increase the production or introduce a new product line. Cash flows used for expansion are related to the expansion only, whereas for replacement decisions, incremental cash flows have to be considered.

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